Swimming against the tide

1. Swimming against the tide Raamdeo Agrawal 12 February 2016

2. What is the tide? Tide refers to current investment headwinds — • Global deflation • Economic stagnation in India • Stagnant corporate profits • Flattish markets

3. Flattish markets for 5 years 5 year CAGR : 6.3% 3 year CAGR : 6.9% 1 year CAGR : -16% As on 10th Feb 2016

4. How to swim against the tide?(i.e. earn at least 15% absolute return for investors, irrespective of market conditions)

5. What helped us swim against the tide … … Knowledge First – 20 years of Wealth Creation Studies

6. … and how we swam against the tide Focused-35 v/s Nifty Last 1 year F35 down by 3.3% Last 1 year Nifty down by 16.4% As on 10th Feb 2016

7. General insights into investing

8. Importance & Knowability Matrix

9. Warren Buffett’s Investment Process • A business we understand; • Favorable long term economics; • Able and trustworthy management; and • A sensible price-tag. — 2007 Annual Letter

10. Powerful Mantra for Wealth Creation • To make money in stocks you must have – • the Visionto see them • the Courageto buy them & • the Patienceto hold them. • Patience is the rarest of the three. • – Thomas Phelps in 100 to 1 In The Stock Market

11. Short-term v/s Long-term “In the short run, the market is a voting machine … … but in the long run, it is a weighing machine.” – Benjamin Graham

12. Short-term v/s Long-term Irrational in short-term, rational in long-term

13. Market performance v/s Stock performance HDFC Bank outperforms, while peer SBI underperforms As on 10th Feb 2016

14. Stock performance v/s Portfolio performance Maximum loss on wrong stock is 1x Limited downside, Unlimited upside

15. 3 sources of value Growth Value Only if growth is in the same franchise, and benefits from the competitive advantage Earning Power Value Franchise value from current competitive advantage Asset Replacement Value When entry is free, and there is no competitive advantage

16. Equity allocation & Market levels How investors allocate How investors should allocate Index Index High High Low Low Equity Allocation Equity Allocation

17. QGLP: Our Investment framework

18. QGLP in a nutshell • Q :Quality of business & Quality of mgmt • G: Growth in earnings • L : Longevity of Quality & Growth • P : reasonable Price of purchase

19. QGLP frameworks • Quality frameworks • Growth frameworks • Longevity frameworks • Price frameworks

20. Quality frameworks

21. Q – Quality Quality of Business x Quality of Management 1 X 1 = 1 1 X 0 = 0 0 X 1 = 0

22. Quality Frameworks Great, Good, Gruesome Only 14% of BSE 500 companies earn RoE higher than Cost of equity

23. Quality Frameworks (continued) Uncommon Profits … Emergence & Endurance Uncommon Profits in companies = Uncommon Wealth Creation in markets

24. Quality Frameworks (continued) Uncommon Profit & Company lifecycle

25. Quality Frameworks (continued) Value Migration “Value migrates from outmodedbusiness design to superior business design.” — Adrian Slywotzxy

26. Quality Frameworks (continued) Quality v/s Growth

27. Growth Frameworks

28. G – Growth Understanding 2 years Growth is a science but Understanding long-term Growth potential is an art

29. Growth Frameworks India’s NTD (Next Trillion Dollar GDP) Linear growth … Every successive NTD of GDP takes fewer years

30. Growth Frameworks (continued) India’s NTD (Next Trillion Dollar GDP) … Exponential opportunityWhen per capita GDP doubles, discretionary spend becomes 10x

31. Quality Frameworks (continued) Winner Categories, Category Winners • Winner Categories = Consolidated sector + Scalability • Category Winners = Winning Categories + Entry Barriers + Great Management • Great Investments = Category Winners + Reasonable Valuation

32. Growth Frameworks (continued) 100x Indian benchmark indices rise 100x in 30 years

33. Growth Frameworks (continued) 100x 47 enduring 100x stocks over 1994-2014 Note: Price multiples are based on stocks being bought at the low price in the respective year of purchase, and held on to Mar-2014.

34. Longevity frameworks

35. L – Longevity Longevity of Quality & Growth • Extending Competitive Advantage Period CAP(CAP framework covered later) • Delaying mean reversion

36. Longevity Frameworks Longevity of Quality Extend CAP (Competitive Advantage Period), Delay mean reversion Companies enjoy CAP of some years … … but high-quality companies extend it

37. Longevity Frameworks (continued) Power of Compounding Longer the period, exponentially higher the multiple

38. Longevity Frameworks (continued) Longevity of Growth Sum multiples for different growth rates over different periods

39. Price frameworks

40. P – Price Reasonable Price which is significantly below the intrinsic value leaving good Margin of Safety

41. Price Frameworks Quality & Valuation Matrix Identify Quality stocks at reasonable valuation and hold on Quality Low High Low Valuation High

42. Price Frameworks Market Cap to GDP India’s current mkt cap > LPA but below peak of 100% of GDP

43. Price Frameworks Payback ratio Less than 1x is almost a sureshot formula for multi-bagger Payback ratio = Market Cap Next 5 years PAT

44. Conclusions • You can swim against the tide (i.e. make money in flat markets) … provided you have the requisite skills. • The requisite skills come from a good investment philosophy, and pig-headed determination of practising it. • A good investment philosophy evolves after years of research, practice, and fine-tuning. • We believe our investment philosophy – QGLP and its continuous improvement – should help us deliver sustained superior performance.

45. Thank you ! Happy investing using frameworks& best wishes forswimming against the tide !!